Little Hope for Reform in Foreclosure Settlement Negotiations

New OrlFannie and Freddieeans The industry spins the numbers differently each month.  Foreclosures are rising, but somehow housing markets are being revived by refinancing.  Little of it makes sense and often the information is contradictory, but the bottom line is that housing is still in dire straits across the country.  The home mortgage modification program has been a huge and unmitigated failure noted by almost no one but the millions of homeowners who have hoped and then frustratingly lost their homes or are still hanging out in limbo.

A small glimmer of hope had been offered by the lawsuit filed against banks and mortgage servicers by a small army of state attorneys general.  Today’s Wall Street Journal reported on the progress of the discussions including the government’s proposal for a $20 billion dollar hit.

Under the administration’s proposed settlement, banks would have to bear the cost of all writedowns rather than passing them on to other investors. The settlement proposal focuses on pushing servicers who mishandled foreclosure procedures to eat losses, by writing down loans that they service on behalf of clients. Those clients include mortgage-finance giants Fannie Mae and Freddie Mac, as well as investors in loans that were securitized by Wall Street firms.

Bank executives say principal cuts don’t necessarily improve payment patterns, and have told other parties involved in the talks that principal reductions could raise new complications. First, it will be difficult to determine who gets reductions and who doesn’t. And even if banks agree to a $20 billion penalty, the number of mortgages that can be cured with that number is limited, one of these people said.

If a single settlement can’t be reached, different federal agencies could seek smaller penalties through regular enforcement channels, and banks could face the prospect of separate civil actions from state attorneys general.”

$20 Billion is a nice number for a penalty, but reading the bankers’ whines between the lines, we can already tell that this will be a very sloooowww and drug out process, not the least of which will involve coming up with the assessment on home value and writedown amounts.  There is no way to read the various arguments that bankers are making without seeing them as trial balloons they are letting go to see if any work.  Furthermore the notion of multiple settlements with different federal agencies meting out different penalties sounds like pure and simple chaos, and certainly nothing that will help homeowners.

Hope springs eternal, as the saying goes, so keep fingers crossed, but this early preview indicates that any hope for a happy ending here seems unlikely in another horror show feature.


Frontlines in Phoenix Foreclosureville

Phoenix    under-water1 A block away there was one sign still standing that said Holiday Gardens – “covenant restricted” — while the other was nothing but brick since the sign was long gone.  A couple of blocks away an old neighborhood watch sign said this was Heatherbrae or some such neighborhood.  Side by side both areas spoke of in-city subdivisions built in the late 50’s and hard 60’s for working families with solid, lower middle class jobs, and hopes for the future in the City of Phoenix.  Brick bungalows with two and three bedrooms where little was pretentious and improvements might mean paving part of the front to park another service pickup or car.  The kind of area where when asked, people described it as “mainly quiet,” and where you knew a lot of families had been raised here over 50 years.   I lived for 10 years as a boy and teenager in New Orleans in a similar neighborhood in Oak Park that the Levee Board had reclaimed from swamp and sand, just as this land had probably been pulled from the desert.  These are good neighborhoods.  Not for everyone, but they work for a lot of people and a lot of places.

Within 100 yards of either direction of the folks I was visiting, there were perhaps 8 to 10 houses that had been foreclosed; including the house I was being shown.  There were a couple of “for sale” signs, but mainly the houses were dark and abandoned, big 80 gallon garbage cans rolled up in the front yards.

The house I visited had gone underwater and been lost on a “short sale.”  A brother-in-law of a friend had a wife’s cousin who had lost the home and my friends had rented as a favor.  There was talk of buying.  The price was almost ridiculous:  $22000!  The house was laid out nicely with new cabinets in the kitchen, paint only a year or two old in the bedrooms, and tile almost brand new.  The owners had had a notion to close in the back patio, probably as a den or family room, and it was almost finished.  Nothing is perfect.  The air conditioners were shot, so it had been a hot Phoenix late summer.  The water heater was out, so cold showers were the rule, but at $22,000 these were relatively small problems.

In saving neighborhoods this would be a good example of a house that would be a perfect match for people who wanted to love it.  Even at $22000 and a note with taxes and insurance that would be only a shade over $400 per month on the terms being offered, it would still be cheaper than rent, but with no subprime lending market or stated income loans, where would even that small sum be borrowed?

Risk investment pools had been created it seems.  For $6000 down and closing, my friends had been offered a loan at 9% — double the prevailing rate – for 5 years with a balloon payment at the end.  The investors probably didn’t really care what would happen to house or homeowners.  Given the 1 to 1.5% interest out there on money, they stood to recover quickly on such a modest loan at these rates or they could flip the house again and hope that in 5 years when the even the Phoenix housing market might start recovering that reselling would gain more.  The market is so far down now, anything might look like up, and only the families that have already lost their homes or who are begging for modifications along with their bankers have any real memory that 2 years ago the house might have been priced and mortgaged over $150,000.

Here in Foreclosureville it’s hard to see any happy endings yet for families, houses, or neighborhoods, and I don’t see one here yet either.  Banks are clueless and without a plan.  Cities and states are either broke or in Arizona’s case broke and disinterested in anything that might look like a helping hand.  Another 10 houses on this long stretch of block not far from Camelback and this area could be at the tipping point of a horizontal ghetto of broken and abandoned properties.

I don’t even think governments and banks really understand what is happening in Foreclosureville, but having visited once again and spent time here, I can guarantee it won’t  be pretty even with all of the hustle and bustle to try and start something fresh that I found in this one house along a dark stretch under the starlit sky of Phoenix.